Cryptocurrencies: If FTX Crash Triggers a ‘Lehman Moment’, What Happens Next?

CNN Business

As one of the largest and most prestigious players in the digital asset market, the shocking downfall of the FTX exchange raises alarm Among those who own cryptocurrencies as investors seek cover.

There are still many unanswered questions. But two big questions loom: How far will the damage spread? Can the battered cryptocurrency industry bounce back?

Industry insiders are debating whether to call the implosion of FTX, which filed for bankruptcy on Friday, a “Lehman moment,” a reference to the 2008 collapse of the investment bank that sent shockwaves across the globe. Many consider this an apt comparison.

What is clear is that the impact of the FTX crisis has injected huge volatility into the crypto ecosystem. The incident destroyed confidence and inspired regulators, who are now on high alert.

“This is one of the most trusted entities in the crypto space, so it will take some time to recover,” said Jay Jog, co-founder of California-based blockchain startup Sei Labs.

“Shit storm.” “Crazy.” “Chaos.”

These are the terms crypto investors and pundits use to describe the failure of FTX, which was launched in 2019 by the 30-year-old prodigy Sam Bankman-Fried, who was once known as the modern-day JPMorgan Chase.

The company was valued at $32 billion in its latest funding round and has recruited high-profile backers including SoftBank, Tiger Global, Singapore’s Temasek, and celebrities such as Tom Brady, Gisele Bündchen and Naomi Osaka. Its name is on the playing field of the Miami Heat.

This week, investor Sequoia Capital Say It has reduced the value of its FTX stake to $0. The exchange – which is said to be short of $8 billion to $10 billion – was unable to meet customer withdrawal needs. Bankman-Fried resigned on Friday, and FTX filed for bankruptcy protection in the United States after rival Binance’s bailout failed.

“Everyone was a little bit shocked,” said Shan Jun Fok, co-founder of Hong Kong-based crypto investment firm Moonvault Partners. “A lot of people believe that FTX is the gold standard.”

He likened FTX’s collapse to Enron, the corporate fraud scandal that led to the unexpected bankruptcy of the US energy company in 2001.

Sam Bankman-Fried, founder and CEO of FTX, speaks at the annual meeting of the Institute of International Finance in Washington, DC on October 10.  January 13, 2022.

The situation is still developing rapidly. But one concern is how it could affect the entire crypto industry, which was worth more than $1 trillion in August.

Over the summer, as digital assets plummeted On the value side, Bankman-Fried poured about $1 billion into bailing out businesses and propping up assets in an attempt to keep the industry afloat. Now, there are only a handful of white knights left to rescue FTX and others in distress.

“In the crypto ecosystem, the number of entities with stronger balance sheets that can rescue low capital and highly leveraged entities is shrinking,” JPMorgan strategists said in a note to clients this week.

The demise of FTX could cause other casualties. Despite the obvious knock-on effects, it’s currently difficult to know who’s been exposed.

The prices of bitcoin and ether, the two most-held cryptocurrencies, have fallen by more than 20% over the past week. The price of Solana’s digital coin was also hit hard by reports that Bankman-Fried’s trading firm, Alameda Research, holds significant holdings. The Tether stablecoin, which is supposed to be a safe place to store cash, recently broke its one-to-one peg to the U.S. dollar. Crypto lending platform BlockFi said Thursday, Suspend customer withdrawals.

Traditional investors were also burned, despite reassuring clients that they could handle the fallout. The Ontario Teachers’ Pension Plan said that despite the uncertainty, losses related to its $95 million investment would have a “limited impact” as the stake represented less than 0.05 per cent of total assets.

Binance CEO Changpeng Zhao, tweet He has been texting Nayib Bukele, the president of El Salvador, who has gone all-in on bitcoin. “We don’t have any Bitcoin in FTX, we never had any business with them,” Zhao recounted from Bukele. “Thank God!”

Analysts noted that after months of turmoil, a lot of risky activity had been purged from the system.

But more pain could happen if frightened investors withdraw their funds from cryptocurrencies.JPMorgan Think Bitcoin could fall to $13,000, down nearly 22% from where it is now. Huo said the digital coin could fall below $10,000, its lowest point since 2020.

In this case, the “crypto winter” is set to get worse, especially as concerns about the broader economic backdrop continue to dent appetite for risk assets.

“In the short term, this is going to be very, very bad for the crypto industry,” said Sei Labs’ Jog. But he doesn’t think it’s completely “over,” and hopes it will boost interest in his business, which The business is focused on building a more transparent, decentralized cryptocurrency exchange.

Fok said he expects the FTX crash to push institutional investors away from the crypto space, just as they have been warming up. While some will continue to work on interesting projects, it may take years to regain confidence in the industry’s prospects.

It is almost certain that regulators will be more daring to tighten the screws, raising costs for crypto firms that have survived the unfolding purge.

“This reinforces the idea that any type of financial business needs extensive regulation,” said James Malcolm, head of foreign exchange strategy and crypto research at UBS. “Probably by 2024, the whole world will look more coherent and invulnerable.”

The head of the SEC, Gary Gensler, said on CNBC on Thursday that while the crypto space is regulated, investors “need better protection.” The Wall Street Journal reported that the SEC and the U.S. Department of Justice are investigating FTX. (The Justice Department declined to comment.)

At a conference in Indonesia on Friday, Binance’s Zhao said the 2008 financial crisis “may be an accurate analogy.”

“We’ve gone back a few years,” he said. “Regulators will rightfully scrutinize the industry more closely, which honestly could be a good thing.”

— Allison Morrow contributed reporting.

Source link